Editorial: Physician, Price Thyself; Medicare’s Rate-Setting System

Reporters Peter Whoriskey and Dan Keating of The Washington Post have opened readers’ eyes to the fact that Medicare pays for physician services — a $69.6 billion item in 2012 — according to an arcane and little-known price list, over which doctors themselves exercise considerable and less-than-totally-transparent influence.

Known as the Relative Value Update, the process consists of a 31-member committee of the American Medical Association recommending what Medicare should pay for some 10,000 procedures — with the fees based in part on how long it takes to complete each one. This time-and-motion study often fails to take full account of changing technology and other factors affecting physician productivity, so anomalies result: For example, Medicare pays for a 15-minute colonoscopy as if it took 75 minutes.

Bizarre as this system may seem, it was considered a reform when first adopted two decades ago; previously, Medicare paid even vaguer “usual, customary and reasonable” rates. The health-care market is unlike most others; it’s inherently difficult to set prices through competition when consumers are at a huge information disadvantage, relative to providers, and when insurance, such as Medicare, shields them from the full costs of their purchases. The Relative Value Update was an attempt at a second-best solution.

As its name suggests, the purpose of the Relative Value Update Committee is not to help decide how much Medicare spends but rather to distribute funds according to ostensibly objective criteria. Nor does the committee exercise untrammeled control; in about 30 percent of recent cases, Medicare officials refused its suggestions. The AMA says it will review colonoscopy charges in an April meeting, and Medicare is scrubbing its price list.

Even allowing for all of that, it’s hard to defend a system that, according to the Post story, pays gastroenterologists as if 41 percent of them are performing more than 12 hours’ worth of procedures a day. The Relative Value Update Committee has historically favored specialists relative to primary-care physicians, perpetuating a broader bias in U.S. health care. Nor is it clear why Congress should privilege the AMA — which is not only an expert organization but also an interest-group lobby — with the first say on relative value estimates.

The Post story provides yet another reason for Congress and the courts to allow full public access to Medicare’s physician payment database, which the AMA has historically resisted. Meanwhile, the House is considering a bipartisan bill that would require Medicare to collect data on doctors’ time usage and adjust payments accordingly. Rep. Jim McDermott, D-Wash., proposes creating a separate federal advisory committee as a counterweight to the Relative Value Update Committee.

Even these promising measures would not change the fundamental issue with relative-value pricing: It reflects physician inputs — not patient outcomes. This shortcoming is not unique to Medicare. In fact, the entire health-care system still operates on a fee-for-service payment model despite well-documented concerns about its consequences for cost and quality.